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For insurance lawyers on both sides of the fence, the Pennsylvania Supreme Court’s Dec. 31 decision in Prudential Casualty Insurance Co. v. Colbert includes both good news and bad. The state’s highest court was asked in Colbert to decide two purely legal questions certified by the 3rd U.S. Circuit Court of Appeals. The justices unanimously ruled against the insurer on the first, but split 5-2 in favor of the insurer on the second. In the first ruling, the justices unanimously held that since Pennsylvania law defines the term “insured” in an auto policy to include any “resident relatives” of the named insureds, a Prudential policy cannot impose a more restrictive definition that deems such resident relatives to be “insured” only when they are using a vehicle specifically insured under the policy. “Nothing in the MVFRL [Pennsylvania Motor Vehicle Financial Responsibility Law] permits Prudential or any other insurer to diminish the MVFRL’s definition of ‘insured’ and thereby provide coverage of a lesser scope than the MVFRL requires,” former Chief Justice Stephen A. Zappala wrote. Zappala found that even when the terms in an insurance contract are clear and unambiguous, they cannot be “in conflict with, or repugnant to” the statutory provisions of MVFRL. Instead, Zappala said, such conflicting terms “must yield to the statute, and are invalid, since contracts cannot change existing statutory laws.” Answering the precise question certified by the 3rd Circuit, Zappala wrote: “We hold that the restrictive definition of ‘insured’ within the Prudential policy impermissibly narrows and conflicts with the plain language of the MVFRL.” But despite losing that battle, Prudential won the war when the justices addressed the second question — whether Prudential’s “other household vehicle” exclusion violates public policy. Zappala found that when public policy is raised in a challenge to the application of a policy exclusion, Pennsylvania courts have called for a case-by-case analysis. Adam Colbert was living with his parents when he was injured in an accident on Aug. 26, 1996, while driving his own Oldsmobile Cutlass. At the time of the accident, he had an insurance policy with State Farm Insurance Co. His parents, Gary and Christine Colbert, had an insurance policy with Prudential which included underinsured coverage and covered three vehicles — but did not cover Adam Colbert’s. After Adam Colbert collected the maximum underinsured motorist benefits under his own policy, he turned to his parents’ policy for further recovery. Prudential denied the claim, asserting that Adam Colbert was not an insured under the terms of his parents’ policy and that he was excluded from recovery under the “other household vehicle exclusion.” Ultimately, Prudential filed suit in the U.S. District Court for the Western District of Pennsylvania seeking a declaration that it owed no coverage. U.S. Magistrate Judge Robert C. Mitchell recommended summary judgment in favor of Prudential on the grounds that Colbert was not an insured under his parents’ policy. U.S. District Judge Gary L. Lancaster agreed and also held the Prudential policy validly excluded Colbert from UIM benefits under the other household vehicle or “family car” exclusion. On appeal, the Colberts argued that both Mitchell and Lancaster were wrong. They urged the 3rd Circuit to hold that Prudential’s definition of “insured” was impermissibly restrictive, and that the family car exclusion, as applied to Adam Colbert, was contrary to public policy. The 3rd Circuit found that both issues in the appeal were controlling questions of law that had not yet been decided by the Pennsylvania Supreme Court. Zappala sided with the Colberts on the first question, holding that Adam Colbert was an “insured,” but sided with Prudential on the second question, holding that application of the family car exclusion would not violate public policy since insurers are not required to provide gratis coverage for a car they never knew existed. “Neither Adam nor his parents paid Prudential to insure his car,” Zappala wrote for a five-justice majority. “Indeed, the ‘other household vehicle exclusion’ in Prudential’s policy expressly excluded such vehicles from coverage. Likewise, there is nothing to suggest that Adam or his parents ever disclosed Adam’s vehicle to Prudential,” Zappala wrote. Under such facts, Zappala said, voiding the exclusion would force Prudential “to underwrite unknown risks that the insureds neither disclosed nor paid to insure.” Instead, Zappala said, a ruling in favor of the Colberts would violate public policy because “Adam would stand to receive gratis coverage or, more accurately, double coverage.” Zappala found that voiding the exclusion “would empower insureds to collect UIM benefits multiplied by the number of insurance policies on which they could qualify as an insured, even though they only paid for UIM coverage on one policy.” As a result, Zappala said, “insureds would receive benefits far in excess of the amount of coverage for which they paid.” If the Colberts prevailed, Zappala said, “insurers would be forced to increase the cost of insurance, which is precisely what the public policy behind the MVFRL strives to prevent.” But Justice Ronald Castille dissented, saying he believed application of the family car exclusion in the Colberts’ case does violate public policy because the parents paid for coverage for their son. Castille, who was joined by Justice Sandra Schultz Newman, said he agreed with Zappala’s ruling on the first question, but disagreed with the second holding. The Colberts, Castille said, “specifically and voluntarily purchased underinsurance coverage that insurers are required to offer by the MVFRL, but consumers are not obliged to purchase, and they paid premiums for that optional coverage to both Adam’s insurer and Prudential.” Castille complained that the majority’s decision upholding exclusion “far from furthering the purposes of the MVFRL, instead thwarts them by allowing insurers to deny benefits for which their insureds have specifically paid. Such a circumstance, in turn, provides a disincentive to insureds to pay premiums for coverage not required by law.”

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